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Know its Value. Factors of Home Valuation.

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Home > Education & Events > February 2019 > Know its Value. Factors of Home Valuation.

Whether you are buying, selling, refinancing or planning on staying a while, your home’s value is an important piece of your financial picture.  There are several common ways to determine what your home is worth. However, each of the valuation methods have different purposes and their values are typically not exactly the same.

Assessed Value: Each county has different viewpoints on the frequency and timing of their assessment of properties.  When performing an assessment, the assessor considers your home’s age, square footage, room count, outbuildings and other property characteristics. They then compare the characteristics of your home with characteristics of other recently sold homes in your area to determine a value for the property.  

The assessed value is used to determine a property’s tax value. Taxes on real estate are set by local government, based on the financial needs of the community and politics. Local municipals may also offer credits such as homestead credit to lower the taxable value of a property so the assessed value may not always be exactly what the tax value is. It’s important to remember that while assessed value is based on that of other recently sold homes in the area, it is just a value snapshot at a given point in time. Market value today could be very different than value based on an assessment done a year ago. Additionally, assessed value is the opinion of the assessor on that given day so professional opinion of the value can vary.

Market Value:  The market value of a property is the amount a buyer in the open market is willing to pay for that property.  Market value is generally set by other, similar properties in the open market and is determined by a number of factors such as:
  • Supply and demand
  • Nearby schools
  • Employment
  • Shopping
  • Other current trends
If a property is in high demand but supply for that property is low, the price will go up. In a hot market, this could mean the market value of a property is higher than all the other valuation methods included in this article.  If this is the case, the seller usually wins as they typically get more than they are asking for a property. 

Conversely if there is a large supply of a certain kind of property and low demand for that property, the buyer will usually win, as they will likely pay less for that property than they anticipated. Keep in mind that what a seller is asking is not necessarily the market value. The market value is what that seller actually receives.  
Appraised Value:  Like assessed value, an appraised value is one person’s opinion on a given day of a property’s value based on property specifics, recent sales, and their professional judgement. There are several different valuation methods appraisers use in determining the appraised value, including comparable sales, income and cost approaches.  Not all approaches are required for every appraisal. The property specifics, intended use of the property, current economics and the appraiser’s expertise all play a significant role in which valuation methods the appraiser chooses to use in determining value. 

Investor requirements also influence how the appraiser might complete an evaluation. It’s important to remember that appraised value and market value may not always align. Appraisals are generally conducted using closed sales, meaning a look back at value. Market value is determined based on properties currently listed, involving looking forward.

Insurable Value:  In short, the insurable value is the amount an insurance company is willing to give in the event you experience damages to your property. The goal of Property and Casualty Insurance is always to get you back where you were the second before you suffered a loss. 

Each insurance company will have slightly different valuation methods for determining a property value but the basics are the same.  A homeowner’s policy is will be based on actual cash value or replacement cost.  Actual cash value is the current cost of replacing the property with an identical or like-kind, less depreciation and obsolescence.  Replacement cost is the current cost to replace the property with the same quality and utility without factoring in depreciation. 

A homeowner’s policy should include coverage for all buildings on the property (including the dwelling) as well as personal property and liability.  Depending on the type of coverage the policy carries, more weight might be placed on construction cost or market value.  Speak with your insurance agent on an annual basis to review your policies to ensure you have the coverage you need. 

Construction Cost:  Brick by brick there is a cost associated with building a home from the ground up.  Because of various economic factors the cost to build a new home today can be different than it was last year or will be next year.  The construction cost is the total cost it takes to build the home today.  Keep in mind that what it costs to build might not be the same as any of the other home valuations but will likely be closest to insurable value.

These are the most common valuations methods for residential properties. Each method has its own purpose but can affect other valuations. A home is an important part of your overall financial picture so make sure you know what yours is worth.

Interested in learning more about appriasials and home mortgages? Contact a member of our team today! 
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